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Decision Modeling for Managers - Assignment #1 MBA 2015

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Decision Modeling for Managers

Assignment #1

Weight: of overall assignment grade ( x 25%)

Submission Deadline: 9 p.m., Sunday, 17thNovember

NOTE: This is an individual assignment to be done independently.

An honor pledge confirming that it is your own work will be taken before you are able to submit online.

Instructions

Failure to adhere to instructions will result in serious grade loss.

On the following page is the ROZGAR.PK decision-modeling exercise. The required tasks are stated in the

Assignment Questions section of this case-based exercise.

Kindly comply with the following instructions:

1. Completion of the assignment is an essential requirement for passing this course. Attempt all tasks inthis assignment (including its quiz scheduled for the following class) to avoid an incomplete grade.

2. Submission File and Format: In the Assignments section on the course LMS portal, download the filenamed DMM_Assign1_1501xxxx.xlsx.

a. Rename the file by replace the 1501xxxx ending with your own roll number.b. Use this renamed workbook to develop your ROZGAR.PK model (Note: make backups of

different stages of your model as well to avoid losing work).

c. On the sheet entitled PART1:i. Enter your Roll No.

ii. Complete the questions in Part 1 of the assignment and paste the value (not cellreference) in cell next to the appropriate question number (e.g. 1.3 means Part 1Question 3).

d. On the sheet entitled PART2, input your analysis against the appropriate question numberfor Part 2. Keep your analysis to the point and do not exceed the area provided for the

answer. Do not alter the cell sizes and only type in the colored cells on this sheet (the text will

automatically wrap within the cell).

e. Ensure all the model, the workings and analysis you wish to submit are contained within thisrenamed workbook and follows the given format. You will only submit this single Excel

workbook. Any other submissions will be ignored.

3. Submission Location: Submit the above-mentioned single spreadsheet workbook, following theabove-mentioned filename style, compatible with Microsoft Excel 2010 version at the Assignmentspage of the course portal on LMS before the deadline stated above.

4. Caution: A significant portion of the grade is dedicated to model design, presentation and clarity ofEnglish (where commentary is required).


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ROZGAR.PK: growing a sales team to grow a business

It was 1stDecember, 2005. Mushtaq Rauf had been running his jobs advertising website ROZGAR.PK foralmost a year now. So far it had been free for Pakistani employers to come and post jobs. To date, Raufhad used resources that were surplus to his current business for running ROZGAR.PK. After all, the jobsite had only meant to be an experiment. But it was now showing a lot of promise. Hence, Rauf beganmaking plans to launch ROZGAR.PK as a completely independent business. The key decision to make

was how fast to grow the size of his sales team.

The need for a sales force

While job-seekers would continue to use ROZGAR.PK for free, Rauf planned to earn revenue bycharging the businesses that posted job advertisements (called paid job ads) on his site. He wastargeting the very large number of small businesses who could not afford to advertise vacancies throughnewspapers. However, such people still had to be convinced about the usefulness of hiring online.

Also, most would not be able to pay using a credit card for ROZGAR.PK job ads online, even if they wereconvinced of its benefits. Rauf planned to create a sales force that would physically go out to thesepotential customers, make paid job ad sales and later collect the cash as well.

After studying sales data of the job site in India called Naukri.com and comparing this withROZGAR.PKs usage growth in the last year, Rauf and his management team came up with a forecast forthe number of paid job advertisements sold per month by eachsales personfor a given number of salespeople. This is as seen inTable 1 below.

Table 1 Paid job ads sold by each sales person per month

Number of sales persons 2 5 20 40

Paid Job Ads sold by each sales person per month 8 7 6 5

Essentially, Rauf had noticed that in smaller sales teams, eachsales person did a better job in makingsales. As the team size grew, it would become difficult to manage. Hence, job ads sold per sales person

would come down. Rauf had already recruited 5 sales persons ready to start work from 1 January, 2006.Based on the above forecast, this meant he forecasted around 7 x 12 months x 5 sales persons = 420 paid

job ads to be sold in 2006 by that sales force. Next year onwards, his plan was to hire 10 additional salespersons at the start of each year. But he was still not sure whether this was the best decision. He didnot want to grow ROZGAR.PK so fast that a lot of cash would be put at risk. At the same time, thebusiness should start paying for itself as soon as possible.

In fact, Rauf thought that sales people would be the most expensive part of ROZGAR.PK. The basicsalary for a sales person would be $5,000 per year. In addition, Rauf planned to follow the standardpractice of paying 12% of revenues in commissions to the sales team. What would be the correct rate togrow the sales force at?

Pricing of paid job adsWhen Rauf and his team prepared their sales forecasting model, they agreed prices would be fixed tocertain levels over the next 4 years. The initial price would be low to attract new businesses. Thengradually these would be increased. These prices are shown inTable 2 below.

1The case is roughly based on challenges and insights observed in the authors original case on the real business ROZEE.PK. They faced asimilar situation of balancing sales-force size with available capital while growing their paid model business and did use estimates fromNaukri.com to forecast. Monis Rahmans (CEO of ROZEE.PK) help in identifying elements of the projections is greatly appreciated andacknowledged. ROZGAR.PK, itself, is a fictitious company. Mushtaq Rauf is a fictitious character. All data given here is also fictitious.

Shazib Shaikh 2013


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Table 2 Assumed price levels across the 3 years till Dec. 2009

Year Average price per job ad. (in $)

2006 $150

2007 $175

2008 $200

2009 $200

Other expenses

Other expenses forecast for 2006 were going to be $60,000. Rauf expected that when the sales forcecrossed a certain size, he would have to shift to bigger premises and make other business capacityadjustments (computer servers, managers, electricity, etc).

These other expenses would increase in steps. The $60,000 forecast would apply so long as sales peopleremained lesser than 25. After that, for everyadditional25 sales persons, ROZGAR.PK would require anextra$100,000 to cover these other expenses. That meant that at 25 sales people other expenses wouldtotal to $160,000. This would remain the case until they reached 50 sales people, when other expensesshould add up to $260,000 and so on.

Forecasting the financials for potential investors

On 31 December, 2005, Rauf required $50,000 to cover the initial investment for ROZGAR.PK start-upexpenses. Rauf had ties with venture capitalists in the United States. To attract their funds for theinitial investment, he needed a financial forecast and analysis covering the next 4 years, i.e. startingfrom and including the initial cash outflow on 31 December, 2005 and ending on 31 December, 2009.They would be comfortable assuming all cash flows would took place on 31 December. The hurdle ratefor these potential investors over this period would be 20% per annum.

The question that remained was whether all these initial plans and assumptions (the base case) wouldprovide a sufficiently positive outlook? Also, which assumptions were going to be critical and would

need to be forecasted more accurately before presenting to the investors? After the dot com crash inthe US, he was concerned not to expose the business to too much cash outflow. What would be thebest way to grow the sales force over the next 4 years?


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Assignment Questions

Develop a spreadsheet model in Microsoft Excel 2010 to address the following requirements. Layout, ease-of-

use and presentation of the model carry 30 marks (split between Parts I and II). The remainder of the grade

comes from answering the questions asked in each Part.

Part 1(40 marks + 20 model presentation marks)

Required projections from the model: The model should provide a forecast of the NPV and IRR for the period

mentioned above. Also as part of the projections of the model, Mushtaq Rauf would also like to see the effect

of his decisions on the total cash outflows, as well as the net cash flows at the end of each year.

Having developed the model, set it to the base case decisions and assumptions that Mushtaq Rauf has

initially planned for e.g. 10 sales persons added each of the following years, etc. In the PART1 sheet of the

workbook, answer the following questions.

Assuming the base case:

1. In 2008, How many job ads is eachsales person forecasted to sell in the year 2008? ............................... (10)2.

How many job ads are forecast to be sold in totalin the year 2007? ........................................................... (5)

3. How much commission (in dollars) is forecast to be paid to the whole sales team in 2009? .................... (10)For the following questions, now assume 15 sales personsare added each year from 2007 to 2009

4. What are the total cash outflows for 2009?Use a negative sign before the value to show it as an outflow................................................................... (10)

5. What is the NPV for the 4 year period, 31 Dec. 2005 to 31 Dec. 2009? ....................................................... (5)Part 2 (20 marks + 10 chart/table/analysis presentation marks)

Reports generated by what-if/sensitivity analysis tools and brief commentary: Add tool-generated what-if

analysis sheets to support your answer. Only on the sheet labeled PART2 should you provide brief

commentary in your own words for each question that tells us which tools report to look at and what to

understand from it. Do not exceed the space provided in the PART2 sheet when making your commentary.

Commentary should focus on the managerial implicationsand not just quote data without understanding.

The tool-based reports and commentary should address the following questions:

(Reset the model to the base-caseassumptions before attempting the following analyses)

1. Rauf is aware that the inputs and assumptions could be wrong. Parameters that are in percentages orin number of sales persons could be wrong by +/- 20%. For all other assumptions, a +/- 10% margin

of error is expected. Briefly explain which two inputs/assumptions, if wrong, will result in the lowest

NPV estimate and mention clear reasons for your findings? How important are his assumptions

regarding ad sales per sales person? ................................................................................................... (10)

2. Briefly comment on how Raufs decision about the rate at which he adds sales people each yearimpacts the NPV forecast, focusing on the business implications of this relationship? Keeping all

other things at the base-case, what annual rate of sales people addition yields the maximum NPV?

(Hint: you do not need solver to answer this part of the question) ......................................................................... (10)

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